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Challenge to Non-Compete Agreement Upheld

September 1, 2008
Related Topics: Miscellaneous Legal Issues, Wrongful Discharge, Featured Article
When Raymond Edwards began working for the accounting firm Arthur Andersen in 1997 as a tax manager, he signed Andersen’s standard noncompetition agreement. That agreement prohibited him from working for or soliciting certain clients and professional employees for a specified time after leaving Andersen.

    In 2002, HSBC purchased Andersen and offered Edwards a job. As part of its employment offer, HSBC presented Edwards with a "termination of noncompete" agreement for his signature, to release Andersen from "any and all" claims arising from Edwards’ employment with Andersen. Edwards refused to sign the termination of noncompete because he believed he would be foreclosed from seeking indemnification for liability related to his employment at Andersen. Because Edwards refused to sign, HSBC withdrew the job offer.

    Edwards sued Andersen and HSBC in Los Angeles Superior Court for intentional interference with prospective economic advantage and anti-competitive business practices. After Edwards settled with HSBC, the California Superior Court dismissed the claims he also had asserted against Andersen. The appellate court disagreed, and Andersen appealed to the California Supreme Court.

    The California Supreme Court held that Andersen’s noncompetition agreement was invalid because it restricted Edwards’ ability to secure new employment. Andersen’s demand that Edwards sign the noncompete termination is a wrongful act for purposes of his intentional interference claim. The court stated that "a contract provision releasing ‘any and all’ claims generally does not encompass … an employee’s right to indemnification" and therefore is not void. Edwards v. Arthur Andersen LLP, Cal. No. S147190 (8/7/08).

    Impact: Under California law, an employer’s refusal to release an employee from an invalid noncompete agreement provides an employee with a claim for intentional interference with prospects for a job with another company. Employers should consult applicable state and local laws when considering noncompete agreements under any circumstances.

Workforce Management, September 8, 2008, p. 19 -- Subscribe Now!

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